District energy projects are growing in B.C. but opaque corporate structures raise questions about rate-setting oversight

Energy utilities run by B.C. municipalities represent multi-million-dollar public investments aimed at reducing carbon emissions, but how some of them are structured and managed will fall under the scrutiny of an upcoming B.C. Utilities Commission (BCUC) inquiry.

District energy utilities that typically employ geothermal heating and cooling for new commercial and residential developments have become “complex,” according to the BCUC, and some of the ways in which they are managed, such as city-owned corporations engaged in public-private partnerships, do not appear to be clearly defined by the Utilities Commission Act, which regulates utility rates in the public interest.

Furthermore, questions are being raised about whether these municipal utilities are transparent and whether or not they disadvantage other energy providers.

The inquiry will pit powerhouse BC Hydro against local governments as the commission wades through statutory definitions of the Act.

“The BCUC seeks to achieve clarity regarding the appropriate level of regulation required” for municipal energy utilities, states a BCUC opening letter for the inquiry.

A number of B.C. cities have launched these energy systems within the past decade, as politicians dub them “green” since they use locally sourced energy and reduce the need for gas and electricity. Vancouver has a system prominently pushing steam from its stacks next to the Cambie Street Bridge, near Olympic Village. Surrey hopes to expand its own geothermal connections in a planned regional downtown core. The City of North Vancouver employs an energy system in the Lonsdale neighbourhood, and Richmond is quickly expanding its energy systems in several city centre neighbourhoods.

But whereas the local governments of Vancouver and Surrey operate their energy systems directly, North Vancouver and Richmond fall into a more obvious regulatory grey zone, as their respective governments have incorporated companies to manage the utility operations. The inquiry panel wants to have a closer look at whether these companies should have their rates regulated by the BCUC or, importantly, if they should fall under an existing exemption from the Act for strictly municipal energy systems such as in Vancouver and Surrey.

Richmond’s Lulu Island Energy Corp. (LIEC) and North Vancouver’s Lonsdale Energy Corp. both deliver heating and cooling derived from the ground but backed by natural gas boilers. The utility rates are set annually by city council.

“Our interpretation of the Act is it’s not clear in that circumstance that they’re entitled by the same exemption as they would be if the utility was wholly owned” by the city, David Morton, BCUC chair and CEO, told Glacier Media.

Morton estimates hundreds of millions of dollars have been invested province-wide by municipalities seeking to establish and expand their own district energy utility network in the name of combatting climate change.

“In all likelihood it’s an increasing trend,” said Morton.

In Richmond’s case, LIEC was incorporated in 2013. It now owns three district energy entities under its umbrella. To get the ball rolling, the city initially invested nearly $27 million in the Alexandra District Energy Utility (ADEU) — a 3,400-metre network of pipes to power up to 3,100 new residential units, a temple and a WalMart-anchored shopping centre with 19 megawatts of geothermal energy. The city then transferred the assets to LIEC for shares. The company has since agreed to a 30-year public-private partnership with Corix Utilities “to design, construct, finance, operate and maintain” the Oval Village District Energy Utility (OVDEU). Total assets for the OVDEU to date are $9.4 million, and the total estimated full build out is $38.3 million.

LIEC’s 2018 financial statement claims $43 million in total assets with annual revenue of $4.3 million and a net income of $1.5 million. The city expects to have its ADEU capital investment paid off in 19 years from dividends, starting from 2015.

In contrast to Lonsdale Energy Corp., it’s not clear from the LIEC statement how much is presently owed to the City of Richmond. Lonsdale has total reported assets of $34.3 million and clearly states it has a $22.8 million outstanding loan from the City of North Vancouver, in addition to another $9.2 million in liabilities.

He states in his submission that district energy utilities may disadvantage other private and crown energy providers because cities can “extract capital funding through rezoning.”

Flintoff also contends it’s unstated from LIEC public information how its greenhouse gas emissions compare to that of BC Hydro, which can power baseboard heaters with hydroelectricity. He further argued that these utilities increase the cost of electricity for BC Hydro customers by reducing its customer base.

Flintoff also questioned the transparency of LIEC.

“Rate-setting is usually recommended by staff and approved by council but not an independent Commission. Unfortunately, city senior staff also sits on the boards of these utility corporations, and therefore they are in a conflict of interest situation when rates are set,” wrote Flintoff. Because LIEC is incorporated, its employee salaries are not reported as they would be if run by the city.

Ultimately, Flintoff contends the LIEC is not a municipal entity and the Utilities Commission Act is “clear” that any non-municipal entity should be regulated.

BC Hydro’s submission aligns with Flintoff. Its interpretation of the act is “the exclusion does not necessarily extend to a separate entity that owns or operates facilities providing services to the municipality or to customers within the boundaries of the municipality.”

“A corporation with shareholders is not a municipality that has been incorporated under the Local Government Act, the Vancouver Charter or other Act,” stated BC Hydro.

Richmond’s submission argues the opposite of BC Hydro and seeks to maintain or clarify its independence from the BCUC.

Richmond City’s lawyer Anthony Iraci wrote the Community Charter allows municipalities to provide services “directly or through another public authority or another person or organization.”

Iraci contends “any narrower interpretation” of the Utilities Commission Act “would frustrate the legislative scheme and interfere with the ability of a municipality to fulfil its municipal purposes set out in Community Charter.”

A passionate supporter of geothermal energy, Richmond councillor Harold Steves told Glacier Media that Richmond’s energy company does “undermine” BC Hydro, and “that’s exactly what it should do.”

He said district energy will provide stable rates to residents when he surmises the roughly $12 billion Site C dam will result in higher costs for its ratepayers.

He contends local energy sources will reduce the need for more dams and transmission infrastructure.

As for transparency, Steves said he does not care if it is run directly by the city.

As for clarity regarding the stated GHG reduction targets of LIEC — a key selling point to the public — and whether they are pegged against natural gas use or hydroelectricty, Steves said that wasn’t clear to him; however, there is still a net reduction regardless.

Arguing alongside Richmond is the B.C. Municipal Electric Utilities (BCMEU), which represents a rare handful of municipal electric utilities, such as in New Westminster.

“The history of the BCMEU members shows that issues with respect to discriminatory rates are rare and, if they occur, are managed through the effective political accountability of municipal councils regardless of whether the municipal council has direct oversight of the utility,” stated BCMEU.

It argues for a “broad” definition of a municipal entity subject to exclusion from BCUC regulation.

“Municipal governments are facing increased pressure to pursue energy service initiatives to respond to climate change challenges. Greater flexibility to structure arrangements to deliver energy services within their municipal boundaries will assist municipalities in meeting these objectives.”

Once the inquiry panel determines the appropriate interpretations of these laws, it could forward legislative recommendations to government, said Morton.